Chinese Solar’s Rocky Year Hoping to End On a High Note

Most long-term investors in Chinese solar stocks already know that the sector is not for the faint of heart.

The Chinese Solar motif has certainly been indicative of the trend: the portfolio was up by more than 50% mere weeks after its creation in early 2012, then was down about 65% just 11 months later. A year after that – the motif was back up 60%.

Its little surprise then that the motif currently offers another half-empty/half-full view: While Chinese Solar sold off sharply in the past month, down 8.5%, it is still up more than 16% over the past two months.

The S&P 500 was off 2.6%% in the past month and has increased 2% in the past two months. For the year, the Chinese Solar motif is down 15.4%, while the S&P is up 6.9%.

However, the rollercoaster this fall in Chinese solar stocks hasn’t been completely unexpected – at least by analysts who have projected a rise in solar-panel demand in the second half of 2014.

Earlier this month, JPMorgan analysts Paul Coster, Mark Strouse and Paul J. Chung expressed their bullishness on the industry, saying photovoltaic solar demand could grow more than 20%, as demand in developing markets seems to be accelerating.1

According to Barrons.com, the analysts said China is emerging as the leading end-market for solar due to the ongoing need for clean energy. They added that the country’s 13th five-year plan calls for renewable to supply 15% of primary energy by 2020, which would require about 100 gigawatts of solar installation.

Meanwhile, they said, India’s national solar policy is calling for 20GW of solar capacity by 2022, which the analysts said could be upsized by the Modi-led government which is now calling for 34GW of capacity by 2022.

The investment bank also pointed to a favorable offering of first-half earnings by the companies, saying that the ten “Tier 1” solar PV companies that it tracks posted average sales growth of 44%, with 492 basis points of margin expansion in the first half of the year. “Growth in the US and Japan was very strong and China is expected to be the biggest contributor to 2H growth,” they wrote.

This upbeat view was reiterated a couple of weeks later by analysts at Deutsche Bank, who said in a research note that they saw a sharp pick-up in demand in China after the country’s energy sector regulator reiterated its intent to support the development of distributed systems.2

“Most industry participants are now confident of Chinese market achieving 13GW annual installation target this year, which is a significant positive change compared to just a month ago where most industry participants were skeptical of China installing even 10GW this year,” analysts wrote.

Deutsche Bank also said it expected module prices to rise further, noting that “Tier 1 Chinese solar companies are sold out, and we expect this to result in volume upside during the 2H earnings season.”

None of this, of course, is meant to imply that the volatility of Chinese solar stocks will subside, but the underlying industry strength may benefit investors with strong stomachs.

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